This is the last in a series of articles addressing mortgage foreclosure. Our focus is on representing
the investor looking for foreclosure property. There is no shortage of inventory (Minnesota foreclosures were up 26% last
year) or “Get Rich Quick” seminars focusing on distressed properties. Consider the background of your buyer. Is
he/she sophisticated and knowledgeable regarding foreclosures? Is your client excited about the possibilities but clueless
about the process or details of what he/she is doing?
Neophyte Investors. The unsophisticated
buyer needs more protection, but often they don’t recognize it if they sat through a seminar, or read a book or are
following the advice of someone else who they trust more – often improvidently. If the deal hits a snag instead of acknowledging
that your services may have revealed an illegality and saved them major expense and trouble, their perception will be that
your “conventional” thinking obstructed the path to the rewards that have come to so many others.
Experienced Investors. Don’t assume the client’s experience makes them an expert. A history
of success may mean little more than a history of narrow escapes – people can do real estate transactions incorrectly
for years before it catches up with them. Increased public awareness and scrutiny make it more likely that last year’s
success may be this year’s star-case at the Attorney General’s office.
When looking at the transaction
you must first look at the Minnesota Equity Stripping statute enacted in 2004. The statute focuses on “Foreclosure Reconveyance”
transactions. (Other types of equity stripping schemes are subject to other regulations.)
The Foreclosure Reconveyance Transaction Defined
“Foreclosure Reconveyance” defined. The statute defines Foreclosure Reconveyance as the transfer
from a person in foreclosure to the investor, who then re-conveys an interest back to that homeowner. The homeowner retains
possession of the home through the transaction. Reconveyance transactions come in many
forms, limited only by the creativity of the person arranging the deal. To fall under the statute, the investor or purchaser
must fit the definition a “Foreclosure Purchaser.”
The Foreclosure Purchaser Defined. The Foreclosure Purchaser is either the person who acquires the property
in a reconveyance transaction or a person acting in concert with the acquirer unless either has participated in less than
2 such transactions in a 2 year period or is a bank, thrift or credit union.
PRACTICE TIP: A real estate agent can easily qualify as a Foreclosure Purchaser simply by assisting the investor.
Reconveyance Contract Requirements Under The Equity
Stripping Statute
A Written Contract. Even an otherwise lawful reconveyance transaction violates the statute if the Foreclosure
Purchaser fails to enter into a proper written contract prior to the execution of the conveyance documents. In other words,
there must be a conforming purchase agreement.
The purchase agreement must:
• Be in a minimum font size;
• Include information regarding the Foreclosure Purchaser;
• State the complete terms of the deal including the entire consideration given before, after, or incidental to the
sale;
• State the time at which possession will transfer to the Foreclosure Purchaser; and
• Include notices regarding cancellation rights.
The Right to Cancel. The Foreclosed Homeowner has a 5-day right to cancel any contract with a Foreclosure
Purchaser. The cancellation period begins on the day on which the contract is signed, or the last day of the homeowner’s
mortgage redemption period – whichever is earlier. Within 10 days after receipt of notice of cancellation, the Foreclosure
Purchaser must return the original contract and any other documents signed by the Foreclosed Homeowner.
Required Underwriting - Reasonable Ability to Pay. The Foreclosure Purchaser must be able to verify and demonstrate
that the Foreclosed Homeowner has the reasonable ability to pay for the reconveyance.
a. In a lease with option to purchase, you must determine if the Foreclosed Owner is reasonably able to make the lease payments
and to exercise the option. The statute provides a calculation to assist in this determination.
b. If the Foreclosurer Purchaser does not obtain documented verification of ability to pay there is a rebuttable presumption
that the Foreclosure Purchaser has not verified ability to pay.
Cap on Foreclosed Homeowners Loss. If the Foreclosed Homeowner cannot complete the terms to buy back
the property, the Foreclosed Homeowner must receive consideration of at least 82% of the fair market value of the property
within 150 days of losing possession. This requirement is designed to prevent the Foreclosurer Puchaser from reaping a windfall.
The formula is too complicated to describe effectively here, however it must be followed or you risk turning an otherwise
lawful transaction into an unlawful one. Consideration is defined as “any payment or thing of value provided to the
Foreclosed Homeowner”.
NOTICE:
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly
applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can
be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in
a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney
competent in the field of practice relevant to your situation.
Copyright 2007 Nash & Lodge, PLLP